- In economics, depreciation is the gradual decrease in the economic value of the capital stock of a firm, nation or other entity, either through physical depreciation, obsolescence or changes in the demand for the services of the capital in question.
- It is a method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes.
- For accounting purposes, depreciation indicates how much of an asset’s value has been used up. For tax purposes, businesses can deduct the cost of the tangible assets they purchase as business expenses;however, businesses must depreciate these assets in accordance with IRS rules about how and when the deduction may be taken based on what the asset is and how long it will last.